New Delhi: India’s market regulator, the Securities and Exchange Board of India (SEBI), is reportedly considering introducing a new category of mutual fund schemes that would link asset managers’ charges to performance.
This would mean that fund managers would be able to charge additional fees if their funds consistently outperform the relevant benchmark index and deliver higher annualised returns. The proposal, which aims to incentivise fund managers to deliver better returns, is part of a wider review of the fees charged by India’s asset management industry.
If the proposal is introduced, India will join a small number of major markets that offer performance-linked fees for mutual funds. The plan involves reducing the base fees currently charged for mutual funds, while additional charges would be based on performance. The SEBI’s mutual fund panel is set to work out the implementation of the proposal, following which public feedback will be sought.
The proposal is part of a broader effort to improve transparency around fees charged by mutual funds in India. Currently, Indian asset management companies can levy charges known as Total Expense Ratio, which range from 0-2.25% of the investment amount. This fee covers the total costs associated with managing the fund. To attract more investors from India’s tier-2 and tier-3 cities, fund houses are also allowed to charge additional fees for marketing and to incentivise intermediaries.
However, SEBI found instances of malpractice during inspections of India’s 44 asset managers. These included cases where different funds charged incentive fees to the same investor. To address this issue, SEBI will only allow funds to charge additional fees if an investor is buying a mutual fund for the first time.
SEBI’s proposal to introduce performance-linked fees on select mutual fund schemes has not been previously reported. The regulator hopes that the option for additional charges will incentivise fund managers to deliver better returns for investors. By linking fees to performance, SEBI hopes to address the issue of many actively managed funds failing to beat their benchmark index.
Overall, the proposal reflects SEBI’s commitment to ensuring that India’s asset management industry operates transparently and fairly. By incentivising fund managers to deliver better returns, the regulator hopes to create a more attractive investment environment for both domestic and foreign investors.
